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11/22/04
Alex Castaldo contributes to Short Selling Thread:
Paul Asquith, then at Harvard and now at MIT, was the author of the famous paper many
years ago that claimed that stocks that are heavily shorted under perform in the
long run
University endowments were enthusiastic about the idea and you
predicted that it would not work.
In his latest paper,
dated just a few days ago, he
qualifies his findings somewhat:
1. The effect shows up for Equal Weighted but not for Value Weighted
portfolios, which suggests that it is confined to Small Cap stocks and is
absent or reduced for Big Stocks.
2. A new variable, Institutional Ownership, is important. It is the stocks
having low institutional ownership which under perform when they are heavily
shorted. Asquith explains this by saying that stocks that are heavily owned by
institutions are the ones that are easy to borrow/short (presumably the
institutions lend the stocks to would be borrowers). When a stock is easy to
borrow Short Sales are not a predictor of future returns. But when a stock is
difficult to borrow (low institutional ownership) and yet someone goes to the
trouble of borrowing/shorting it, THOSE ARE THE ONES that will have low returns
going forward. However this situation is uncommon (20 out of 5500 stocks in
their sample) and for the majority of stocks short sales are not a good
predictor.
3. There are differences on the behavior of shorted stocks on NYSE vs. Amex vs.
Nasdaq.
In summary Asquith has moved somewhat towards your position by backtracking
partially from his earlier conclusion.